Government debt broke through 1 trillion pounds for the first time in December, highlighting the uphill struggle the administration faces to curb borrowing amid growing signs the economy is sliding back into recession.
Although the government cut borrowing by more than 2 billion pounds in December from a year earlier, the euro zone crisis casts a pall over Britain's prospects and could yet derail plans to eliminate the budget deficit by 2017, in turn putting the nation's triple-A credit rating at risk.
The Office for National Statistics said on Tuesday that public sector net borrowing excluding the government's bailout of the financial sector fell to 13.708 billion pounds last month, below forecasts for 14.9 billion, taking borrowing in the fiscal year to date to 103.289 billion pounds, 11 billion pounds lower than last year.
This left the government on track to beat its target to cut borrowing in the 2011/12 financial year to 127 billion pounds from 137.6 billion the year before, with many economists pencilling in a figure of just 122 billion pounds.
The Office for Budget Responsibility, an independent body set up by the government to produce its fiscal forecasts, also indicated it expected the borrowing target to be achieved.
However, economists warned the public finances could come under pressure in the remaining three months of the financial year as weaker growth eats into tax revenues and pushes up benefits claims: effects that will take several months to show up.
Official data on Wednesday is expected to show Britain's economy shrank by 0.1 percent in the last three months of 2011, and many economists reckon it continued to contract in the first three months of this year as well.
Persistent economic weakness may even force Chancellor George Osborne to push his aim to balance Britain's books even further out into the future.
There remains a very real danger that the Chancellor (Osborne) will before long face the difficult decision of accepting further slippage in his fiscal targets, or imposing more fiscal tightening on a struggling economy, said Howard Archer, economist at IHS Global Insight.
BENEFIT OF DOUBT
The government has staked its reputation on a 5-year programme of austerity measures aimed at eliminating the budget deficit, and claims that record low interest rates on government bonds are proof that its policy is working.
Sceptics argue that a weak growth outlook and the Bank of England's quantitative easing programme to buy gilts are the main reasons why investors are willing to accept interest of just 2 percent on 10-year gilts. The euro crisis also enhanced the perception of government bonds as a safe investment.
Of the Group of Seven leading industrialised nations, only Britain, Canada and Germany have managed to cling on to top-notch ratings from all three main credit ratings agencies.
But Britain could drop out of that select group if the euro crisis takes a turn for the worse and tips the nation into a deep recession.
Moody's warned at the end of last year that the euro zone crisis was putting Britain's triple-A rating at risk and further shocks to the economy could derail government efforts to balance the budget.
A small dip in output is unlikely to be enough to trigger a reassessment of Britain's top rating, which will come as a relief to the government after the mass downgrade of euro zone nations' sovereign ratings by credit ratings agency Standard & Poor's earlier this month.
But with overall debt still rising, some analysts warn that it is only a matter of time before the UK finds itself under scrutiny.
Tuesday's data showed public sector net debt excluding financial interventions rose to 1.004 trillion pounds in December, the highest since records began in 1993 and equivalent to around 64 percent of GDP.